Persons deemed securityholders: Overview, definition, and example
What are persons deemed securityholders?
Persons deemed securityholders refers to individuals or entities that are considered legal owners of securities, such as stocks, bonds, or other financial instruments, even if they are not the direct or registered owners of those securities. This concept typically arises in situations where securities are held in a nominee or custodial account, or where the ownership rights have been transferred or assigned to a third party for purposes of record-keeping or administration.
For example, in the context of a brokerage account, the brokerage firm may hold securities on behalf of its clients. While the clients are the beneficial owners of the securities, the brokerage firm may be the registered holder in the records of the issuer. In such cases, the clients are deemed securityholders because they hold the economic interest in the securities, even though the brokerage firm is listed as the holder.
Why are persons deemed securityholders important?
Persons deemed securityholders are important because they have certain rights and obligations associated with the securities they own, even if they are not listed as the direct registered holders. These rights might include voting rights, the right to receive dividends, or the right to receive information related to the securities, such as annual reports or proxy statements.
Understanding who is deemed a securityholder is essential for issuers, financial institutions, and regulators to ensure that the rights of beneficial owners are protected, especially in complex arrangements involving custodians, brokers, or other intermediaries. It also ensures that securityholders can exercise their rights effectively, such as participating in shareholder meetings or receiving distributions.
Understanding persons deemed securityholders through an example
Imagine an investor, Jane Doe, who has purchased shares of a publicly traded company, ABC Corp. Jane holds her shares through her brokerage account at XYZ Brokerage. The brokerage firm, XYZ Brokerage, is the registered holder of the shares in the company’s official records, but Jane is the beneficial owner and enjoys all rights associated with the shares, including the right to vote at the annual shareholder meeting and to receive any dividends.
In this case, Jane is a person deemed a securityholder, even though the shares are held in the name of XYZ Brokerage. Jane's status as a securityholder means she can exercise all the rights of ownership, such as voting on corporate matters, even though her name may not appear in the official register of the company.
Similarly, in the case of bonds, if a person buys bonds through a financial institution that holds them in a custodial account, that institution is the registered bondholder, but the person who purchased the bonds is deemed a securityholder and entitled to receive interest payments and other benefits associated with the bonds.
An example of a "persons deemed securityholders" clause
Here’s how a "persons deemed securityholders" clause might look in an agreement or securityholder rights document:
“For all purposes under this Agreement, any individual or entity who is the beneficial owner of securities held by a custodian, nominee, or intermediary shall be deemed a securityholder. Such deemed securityholders shall have the same rights and privileges as the registered holders of the securities, including but not limited to voting rights, receipt of dividends, and access to relevant shareholder communications.”
Conclusion
Persons deemed securityholders play a crucial role in the functioning of securities markets, as they hold the economic interest in securities even if they are not the registered owners. This ensures that beneficial owners retain their rights to vote, receive dividends, and participate in corporate governance, even when their securities are held by a third party like a brokerage or custodian. Recognizing who qualifies as a deemed securityholder helps clarify rights and responsibilities in financial transactions, particularly in complex investment structures or custodial arrangements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.